News ~ The Profit Doctor

PREMISES ~ A BUSINESS STUDY. “MOVE, OR STAY PUT?”

PREMISES ~ Many businesses find that their requirements change over time regarding the size and style of their premises. A recent study for a Client took that into account. FOR CONFIDENTIALITY THE REPORT HAS BEEN EDITED. There are a large number of variables and all need to be considered. In the case in question, the owners had to stay put because of the the capital invested. There is clearly greater freedom to move if the premises have been rented.

Overview. The brief was to examine the prospects of renting the Varsity Lakes premisies, or selling it. Also, a possibility to re-locate to a shopping village. There were a number of options:

Keep the premises rented as a whole floor.

Spend around $ 60,000 and sub-divide to run a shop selling perhaps an organic type product.

Re-locate to a shopping village and save money and time travel costs working close to home.

Methodology. Due to the complexity of the “puzzle’, the most important issue seems to be the Value of the premises, relative to the Purchase Price of $913,000 plus stamp duty and legals in 2007. Clearly if sold now or in the near future there would be a loss conservatively of $550,000 or more. The likely value might be around the $380-$430,000 based on other commercial properties available on different sites. So selling is not an option unless you have excessive profits that need a write-off, in another company. To get back to what was paid would require around a 12% compound growth per annum for 10 years. That seems unlikely. Taking the Brisbane market predictions, a 3% rise for the next 3 years is tipped. Thus in 5 years’ time the likely value might be high $400’s.

Renting. The next option is to rent but to date there have been no offers. The likely reason is firstly a lack of promotion, and secondly the actual marketing strategy. The position has distinct benefits regarding Space, Design, and internal/external parking. Apparently your agent has said feed-back is that it is too far from the shops and post office. To me, and a colleague I consulted, this is simply an indication that incorrect marketing has been done. Also, the promotion is pathetically bad. The front photo, your main attraction, was taken at the wrong time of day and does no justice to the property. Given proper marketing and promotion, it is considered that a likely renter could be found.

The renting of a 100sq.mt unit is less likely than a 200sq.mt one. There is the added problem that spending $60,000 plus fit-out on a property already well ‘in the red’ does not make much sense. The less you expend on it the better. Considering that there is a suitable re-locating option near your home, examined separately, there are huge travel time and motoring cost-saving advantages.

Conclusion: that the best option is to continue to remain in the current premises although the entire area may not be used. An alternative is to rent the entire floor area and move to the shops nearby. That is not as cost-effective. In that case it would be best to concentrate on leasing the entire 200sq,mt. “as is” with proper promotion.

Derivation of estimates The above conclusions were drawn from the purchase price, and estimate of the rental income and outgoings as supplied. Especially that the present outgoings are $2,300 per week, with a possibility of cutting that by around 30 per cent by re-financing, as supplied by email. The likely rent is expected to be 200m. times $300/sq.mt p.a. plus estimated outgoings BC and Rates/water and then GST at $12,000 p.a. giving a total outgoing of $60,000. Therefore the expenditure if cut by 30% would be reduced to around $80,000 however the incoming rent would still leave a shortfall. The ‘opportunity costs’ taken into account, if the move to the shopping centre nearer is undertaken, are derived from NRMA and RACQ figures. Distances obtained from mapping. Estimates of value and rents derived from two major real estate sites on the internet, brochures, and also discussions with your present Agent and another past colleague in real estate commercial.